the david and lucile packard foundation · depreciation and amortization 1,516 9,606 ... asc 820...
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The David and Lucile Packard Foundation Consolidating Financial Statements December 31, 2010
Report of Independent Auditors
To the Board of Trustees of
The David and Lucile Packard Foundation
In our opinion, the accompanying individual and consolidated statements of financial position and the
related individual and consolidated statements of activities and changes in net assets and cash flows
present fairly, in all material respects, the individual financial positions of the David and Lucile Packard
Foundation and its affiliate, the Monterey Bay Aquarium Research Institute ("MBARI") (collectively, the
"Foundation") and the consolidated financial position of the Foundation at December 31, 2010, and the
individual and consolidated changes in the net assets and their individual and consolidated cash flows for
the year then ended in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Foundation’s management. Our
responsibility is to express an opinion on these financial statements based on our audit. We conducted
our audit of these statements in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
July 14, 2011
The David and Lucile Packard Foundation
Consolidating Statement of Financial Position December 31, 2010 (dollars in thousands)
The accompanying notes are an integral part of these consolidating financial statements.
2
Packard
Foundation MBARI Eliminations Total
Assets
Cash and cash equivalents 185,587$ 27,579$ -$ 213,166$
Interest and dividends receivable 1,660 - - 1,660
Investments, at fair value 5,712,004 - - 5,712,004
Contributions and other receivables 47,775 28,460 (27,006) 49,229
Program-related investments 106,483 - - 106,483
Property and equipment, net 41,792 61,554 - 103,346
Other assets 5,338 3,015 - 8,353
Total assets 6,100,639$ 120,608$ (27,006)$ 6,194,241$
Liabilities and Net Assets
Liabilities
Accounts payable and other liabilities 5,843$ 6,888$ -$ 12,731$
Grants payable 120,732 - (27,006) 93,726
Deferred federal excise tax liabilities 24,729 - - 24,729
Postretirement benefit liabilities 6,659 12,893 - 19,552
Total liabilities 157,963 19,781 (27,006) 150,738
Net assets
Unrestricted 5,942,676 64,821 36,006 6,043,503
Temporarily restricted - 36,006 (36,006) -
Total net assets 5,942,676 100,827 - 6,043,503
Total liabilities and net assets 6,100,639$ 120,608$ (27,006)$ 6,194,241$
The David and Lucile Packard Foundation
Consolidating Statement of Activities and Changes in Net Assets December 31, 2010 (dollars in thousands)
The accompanying notes are an integral part of these consolidating financial statements.
3
Packard
Foundation MBARI Eliminations Total
Changes in unrestricted net assets
Revenue and net investment income
Dividends 32,685$ -$ -$ 32,685$
Interest 8,736 28 - 8,764
Federal awards - 7,957 - 7,957
Rental and other income (166) 1,589 - 1,423
Contributions 400 15 - 415
Net realized and unrealized gains on investments 659,980 - - 659,980
Investment related expenses (10,057) - - (10,057)
Net assets released from restrictions - 35,300 (35,300) -
Revenue and net investment income before
federal excise tax expense 691,578 44,889 (35,300) 701,167
Federal excise tax expense (12,002) - - (12,002)
Revenue and net investment income 679,576 44,889 (35,300) 689,165
Expenses
Grants awarded 234,076 - (36,006) 198,070
Direct charitable expenses 6,195 40,897 - 47,092
Program operating expenses 21,586 11,265 - 32,851
Total expenses 261,857 52,162 (36,006) 278,013
Increase (decrease) in unrestricted net assets
before change in unrestricted net assets from
actuarial gains/losses and amortization 417,719 (7,273) 706 411,152
Change in unrestricted net assets from actuarial
gains/losses and amortization 216 1,189 - 1,405
Increase (decrease) in unrestricted net assets 417,935 (6,084) 706 412,557
Changes in temporarily restricted net assets
Contributions - 36,006 (36,006) -
Net assets released from restriction - (35,300) 35,300 -
Increase in temporarily restricted
net assets - 706 (706) -
Increase (decrease) in net assets 417,935 (5,378) - 412,557
Net assets
Beginning of year 5,524,741 106,205 - 5,630,946
End of year 5,942,676$ 100,827$ -$ 6,043,503$
The David and Lucile Packard Foundation
Consolidating Statement of Cash Flows December 31, 2010 (dollars in thousands)
The accompanying notes are an integral part of these consolidating financial statements.
4
Packard
Foundation MBARI Eliminations Total
Cash flows from operating activities
Increase (decrease) in net assets 417,935$ (5,378)$ -$ 412,557$
Adjustments to reconcile increase (decrease) in net assets
to net cash (used in) provided by operating activities:
Net realized and unrealized gains on investments (659,980) - - (659,980)
Change in net assets from actuarial gains/losses
and amortization (216) (1,189) - (1,405)
Reinvested dividends and non cash interest (16,617) - - (16,617)
Depreciation and amortization 1,516 9,606 - 11,122
Loss on disposal of property and equipment 469 715 - 1,184
Changes in operating assets and liabilities:
Interest and dividends receivable 4,108 - - 4,108
Contributions and other receivables (47,775) 15,225 - (32,550)
Other assets (4,832) (421) - (5,253)
Grants payable (28,401) - - (28,401)
Accounts payable and other liabilities 1,230 974 - 2,204
Postretirement benefit liabilities 954 3,482 - 4,436
Deferred federal excise taxes 9,266 - - 9,266
Net cash (used in) provided by operating activities (322,343) 23,014 - (299,329)
Cash flows from investing activities
Purchases of investments (4,469,590) - - (4,469,590)
Proceeds from sales and maturities of investments 4,063,421 - - 4,063,421
Principal advances to program-related investment
loan recipients (22,899) - - (22,899)
Principal repayments received from program-related
investment loan recipients 52,861 - - 52,861
Purchases of property and equipment (3,589) (3,361) - (6,950)
Net cash used in investing activities (379,796) (3,361) - (383,157)
Net (decrease) increase in cash and
cash equivalents (702,139) 19,653 - (682,486)
Cash and cash equivalents
Beginning of year 887,726 7,926 - 895,652
End of year 185,587$ 27,579$ -$ 213,166$
Supplemental disclosures of cash flow information
Cash paid for federal excise and other taxes 8,048$ 5$ -$ 8,053$
Noncash capital expenditures 640 25 - 665
Transfer of investment real estate to charitable
purpose real estate 10,072 - - 10,072
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
5
1. Organization
The David and Lucile Packard Foundation (the "Packard Foundation") is a private foundation established by David and Lucile Packard. The Packard Foundation provides funding primarily to not-for-profit organizations operating predominantly in three program areas that are of particular interest to the Board of Trustees: conservation and science; population and reproductive health; and children, families and communities. The Packard Foundation's primary facilities are located in Los Altos, California.
The Monterey Bay Aquarium Research Institute (“MBARI”) is a not-for-profit organization founded in 1987 for the purpose of conducting scientific research in marine biology, oceanography, underwater geology, and other kinds of marine research in and around the Monterey Bay and elsewhere, and to educate the scientific community and the general public in regard to such research. MBARI's primary facilities are located in Moss Landing, California.
Certain trustees and officers of the Packard Foundation are also officers or directors of MBARI. Trustees of the Packard Foundation are not permitted to vote for grants to organizations for which they serve as trustees, officers or directors. The Packard Foundation is MBARI's only member, with the power to elect the Board of Directors.
2. Basis of Presentation and Significant Accounting Policies
Principles of Consolidation The accompanying consolidating financial statements include the accounts of The Packard Foundation and its affiliate, MBARI (collectively, the "Foundation"). Since the Packard Foundation has both control and an economic interest in MBARI, the financial statements of MBARI have been included in the consolidating financial statements of the Foundation. All significant intercompany transactions and balances have been eliminated in the consolidation.
Basis of Presentation The accompanying consolidating financial statements are presented on the accrual basis of accounting and in conformity with accounting principles generally accepted in the United States of America applicable to not-for-profit organizations. Revenues are reported as increases in unrestricted net assets, unless there are donor-imposed purposes and/or time restrictions on the gifted assets. Expenses are reported as decreases in unrestricted net assets. Gains or losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law.
Use of Estimates The preparation of consolidating financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of the Foundation's investments and program related investments, the expected useful lives of property and equipment, the determination of postretirement benefit liabilities, and the determination of functional expense allocations.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
6
Unrestricted Net Assets Unrestricted net assets represent unrestricted resources available to support the Foundation's operations and temporarily restricted resources that have become available for use by the Foundation in accordance with the intentions of donors.
Temporarily Restricted Net Assets Temporarily restricted net assets represent gifts that are limited in use by MBARI in accordance with donor-imposed stipulations. These stipulations may expire with time or may be satisfied and removed by the actions of MBARI according to the terms of the gift. At December 31, 2010, MBARI's temporarily restricted net assets consist entirely of gifts from the Packard Foundation restricted to the subsequent year’s operations. Temporarily restricted net assets of $35,300 were released from restriction due to the expiration of time restrictions during the year ended December 31, 2010.
Cash and Cash Equivalents Cash and cash equivalents consist of cash and money market funds. The Foundation considers investments with maturities of three months or less at the time of purchase to be cash equivalents.
Investments Investments are stated at fair value and purchases and sales are recorded on a trade or contract date basis. The estimated fair value of investments is based on quoted market prices, except for alternative investments for which quoted market prices are not available. Alternative investments include private equities, marketable alternatives (including hedge funds), and real assets. The estimated fair value of alternative investments is based on the net asset value of the fund provided by the general partner. The Packard Foundation reviews and evaluates the net asset values provided by the general partner and assesses the valuation methods and assumptions used in determining the fair value of the alternative investments. Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed and differences could be material. Unrealized gains or losses on investments resulting from fair value fluctuations are recorded in the consolidated statement of activities and changes in net assets in the period that such fluctuations occur.
Contributions and Other Receivables Contributions and other receivables represent contributions and redemptions from investments for which the cash has not yet been received.
Fair Value of Financial Instruments In accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements, fair value is defined as the price that the Foundation would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. ASC 820 established a three-tier hierarchy to maximize the use of observable market data and minimize the use of unobservable inputs, and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
7
The three-tier hierarchy of inputs is summarized in the three broad levels listed below.
Level I Quoted prices in active markets for identical assets and liabilities.
Level II Pricing inputs, including broker quotes, are generally those other than exchange quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.
Level III Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include privately held investments and partnership interests.
See Note 3 for a summary of the inputs used as of December 31, 2010 in determining the fair value of the Packard Foundation’s investments.
Concentrations of Credit Risk Financial instruments that potentially subject the Foundation to credit risk consist primarily of cash, cash equivalents, investments and receivables. The Foundation maintains cash and cash equivalents primarily with major financial institutions. Cash equivalents include investments in money market funds. Such amounts may exceed Federal Deposit Insurance Corporation limits. The Foundation's readily marketable securities have been placed with major financial institutions. Receivables consist primarily of funds due to MBARI from the Packard Foundation.
Program-Related Investments Program-related investments at December 31, 2010, include $102,651 of loans made to organizations, $2,878 of collateral deposits that serve to guarantee loans made by third-party lenders to organizations as a means of assisting them in achieving charitable objectives and a $954 equity investment in a sustainable forest management company. Interest rates on loans receivable range from 0% to 5% as of December 31, 2010, and are generally repayable over five to ten years. Management has reviewed the collectability of all program-related investments and has determined no allowance is necessary as of December 31, 2010.
Property and Equipment Property and equipment is stated at cost when purchased or fair value at the date of donation and is depreciated using the straight-line method over estimated useful lives of 3 to 30 years. Leasehold improvements are amortized over the lesser of the asset's useful life or the lease term. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Grants Grants are recognized when the unconditional promise to give is approved. Conditional promises to give are recognized as grant expense in the period in which the recipient meets the terms of the condition. There were no conditional promises to give at December 31, 2010.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
8
Revenue Recognition Contributions are recognized as revenues when they are received or unconditionally pledged. MBARI reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying consolidating statement of activities and changes in net assets as net assets released from restriction. Temporarily restricted contributions are reported as unrestricted support when the restriction is met in the same period as the contribution is received.
Functional Expense Allocations The Packard Foundation's operating expenses have been allocated between direct charitable and program operating activities based on estimates made by the Foundation's management of time spent by employees on various activities.
The Packard Foundation's direct charitable expenses pertain to charitable activities for the benefit of others initiated and conducted in whole or in part by the Packard Foundation. Program operating expenses pertain to the general grant making activities of the Packard Foundation, such as reviewing proposals and awarding, monitoring, and evaluating grants.
MBARI's direct charitable expenses pertain to the general purpose of conducting scientific research in marine biology, oceanography, underwater geology, and other kinds of marine research in and around the Monterey Bay. Program operating expenses include costs related to managing MBARI.
Tax-Exempt Status The Foundation is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and from California franchise and/or income taxes under section 23701(d) of the Revenue and Taxation Code. To the extent the Foundation carries out investment activities that are subject to the unrelated business income tax, it is subject to income taxation.
New Accounting Pronouncements In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update Improving Disclosures about Fair Value Measurements (ASU 2010-06). The ASU 2010-06 amends ASC 820 to add new disclosures about transfers into and out of Levels 1 and 2, and to separate disclosures about purchases, sales, issuances and settlements on a gross basis relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The Foundation adopted this guidance on January 1, 2010. There was no material impact to the financial statement amounts and there were no transfers into and out of Levels 1 and 2 for the year ended December 31, 2010.
3. Investments
The investment goal of the Packard Foundation is to maintain or grow its spending power in real inflation adjusted terms with risk at a level appropriate to the Packard Foundation’s programmatic spending and objectives. To accomplish this investment goal, the Packard Foundation diversifies its investments (directly and indirectly) across various financial instruments and asset categories, and implements multiple investment strategies. The Packard Foundation’s financial assets, with the exception of Hewlett Packard and Agilent, are managed by a select group of external investment management firms and held in custody by major banks. Investments allocated to partnerships, LLCs and commingled funds, have separate arrangements appropriate to their legal structure.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
9
The Packard Foundation’s investments (directly or indirectly) in developed market securities and emerging market securities consist of exchange traded public equities, treasury and corporate bonds. The Packard Foundation’s investments in marketable alternatives consist of long/short, opportunistic and special situation investment management firms, trading public securities and over-the-counter securities. The Packard Foundation’s investments in limited partnerships, private equity and real assets, are in securities and companies that cannot be immediately liquidated, such as buyout and venture capital firms, real estate and natural resource firms. The Packard Foundation’s investments (directly or indirectly) in fixed income securities consist primarily of investment grade instruments issued by the U.S. government and its agencies and by U.S. corporations, U.S. Treasury securities and mortgage-backed securities.
At December 31, 2010, developed market equities include 2,875 shares of Hewlett-Packard Company common stock and 3,088 shares of Agilent Technologies, Inc. common stock with values of $121,038 and $127,936, respectively.
All of the Packard Foundation's real estate investments are located in Los Altos, California and are valued based upon recent appraisals.
Investment securities are exposed to various risks, such as changes in interest rates or credit ratings and market fluctuations. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that the value of the Packard Foundation’s investments and total net assets balance could fluctuate materially.
Legal, tax and regulatory changes could occur during the term of the Packard Foundation’s private partnerships. The regulatory environment for private partnerships is evolving, and changes in the regulation of these partnerships may adversely affect the value of investments held by the Packard Foundation. The Packard Foundation believes that the effect of any future regulatory change on the Packard Foundation’s assets would not be material.
The following table summarizes the valuation of the Packard Foundation’s investments per the ASC 820 fair value hierarchy levels as of December 31, 2010:
Ending
Balance at
Netting December 31,
Level I Level II Level III Adjustments 2010
Developed market equities 1,206,141$ -$ 813,613$ -$ 2,019,754$
Emerging market equities 490,608 - 185,857 - 676,465
Private equities 72,040 - 90,309 - 162,349
Marketable alternatives - 2,053,157 - 2,053,157
Real assets - - 192,098 - 192,098
Fixed income securities - 604,955 - - 604,955
Los Altos real estate and other - - 3,226 - 3,226
Derivative - Assets 2,060 - - (2,060) -
Total investments 1,770,849$ 604,955$ 3,338,260$ (2,060)$ 5,712,004$
Total cash and cash equivalents 185,587$ -$ -$ -$ 185,587$
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
10
The following table summarizes the Packard Foundation’s Level III reconciliation per ASC 820 as of December 31, 2010:
Change in
Unrealized
Gains (Losses)
Beginning Change in Ending for Open
Balance at Realized Unrealized Net Purchases Balance at Positions Held
December 31, Gains Gains (Sales and December 31, at December 31,
2009 (Losses) (Losses) Settlements) 2010 2010
Level III Assets
Developed market equities 389,822$ -$ 113,429$ 310,362$ 813,613$ 113,429$
Emerging market equities 95,357 - 30,500 60,000 185,857 30,500
Private equities 78,163 9,875 5,766 (3,495) 90,309 5,766
Marketable alternatives 1,723,143 47,724 219,057 63,233 2,053,157 246,520
Real assets 48,961 4,944 23,476 114,717 192,098 23,476
Fixed income securities - - - - - -
Los Altos real estate and other 12,429 - (9,269) 66 3,226 (3)
Total 2,347,875$ 62,543$ 382,959$ 544,883$ 3,338,260$ 419,688$
All net realized and change in unrealized gains (losses) in the table above are reflected in the consolidating statement of activities and changes in net assets.
Unfunded purchase commitments related to limited partnerships as of December 31, 2010 are $837,498.
The net gain on the Packard Foundation’s investment portfolio for the year ended December 31, 2010 consists of the following:
Packard
Foundation
Net realized gain 200,371$
Net unrealized gain 459,609
Total 659,980$
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements
December 31, 2010 (dollars in thousands)
11
The Packard Foundation uses Net Asset Value (NAV) to determine the fair value of all the underlying investments which (a) do not have a readily determinable fair value and (b) prepare their financial statements consistent with the measurement principles of an investment company or have the attributes of an investment company. Per the fair value measurements guidelines, the below table lists investment companies (in partnership format) by major asset class:
Additional
Timing to Redemption
Amount of Draw Down Restrictions
NAV in # of Remaining Unfunded Commitments Redemption Redemption In Place at
Asset Class Strategy Funds Funds Life (yrs) Commitments (yrs) Terms Restrictions Year End
Public equity Contains developed 999,470$ 8 1 to 7 64,430$ NA Ranges between quarterly Lock up provisions None
and emerging equity redemption with 30 days of up to 7 years.
notice to annual with
90 days notice.
Private equity Contains growth, 90,309 17 3 to 13 247,122 3 to 10 N/A* N/A N/A
international,
leveraged buyouts
and venture capital
Marketable Contains global long/ 2,053,157 17 1 to 12 47,979 1 to 5 Ranges between monthly Lock up provisions None
alternatives short equity, redemption with 30 days of up to 4 years.
opportunistic, and 0 notice, to an annual
special situations redemption with 180 days
notice.
Real assets Contains natural 192,098 24 1 to 13 477,967 3 to 7 N/A** N/A N/A
resources and real
estate
Total 3,335,034$ 66 837,498$
*These are private equity funds with no ability to redeem.
**These are real asset funds with no ability to redeem.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
12
Derivative Instruments The Packard Foundation’s separately managed accounts transact in a variety of derivative instruments including futures, options, interest rate swaps and credit default swaps primarily for trading purposes with each instrument’s related risk exposure being interest rate, credit, and equity. The fair value of these derivative instruments, held in the Packard Foundation’s separately managed accounts, is included in the Investments line item in the consolidating statement of financial position with changes in fair value reflected in net realized and unrealized gains (losses) on investments within the consolidating statement of activities and changes in net assets.
The following table lists the fair value derivatives held in separately managed accounts by contract type as included in the consolidating statement of financial position at December 31, 2010:
Notional/ Gross Gross
Contractual Derivative Derivative
Amount Assets Liabilities
Equity contracts 2,166$ 2,060$ -$
Total 2,060 -
Netting (see below note)* (2,060)
Carrying value of derivatives included in investments -$ -$
*Note: GAAP permits the netting of derivative assets and liabilities and the related cash collateral received and paid when legally enforceable master netting agreements exist between the partnership and derivative counterparties.
The Packard Foundation’s gains on derivatives held in its separately managed accounts were $383. This amount is included in the statement of activities and changes in net assets for the year ended December 31, 2010.
Swaps Swap contracts involve two parties that agree to exchange the returns earned or realized on specific investments, instruments, or indices/equities. The gross returns to be exchanged between the parties are calculated with respect to a notional amount for a set period of time. The Packard Foundation’s separately managed accounts may enter into various swap agreements: credit default swaps and interest rate swaps. The Packard Foundation’s separately managed accounts will enter into these swap agreements to reduce risk and enhance the overall portfolio structure. Credit default swaps require the protection buyer to make scheduled payments to the counterparty in exchange for a contingent payment by the protection seller. In the event of a credit event, the protection seller will make a payment equal to the notional amount of the underlying index or security (physical delivery or cash settlement). Credit default swaps can be on single name equity, sovereign debt or an index. Interest rate swaps will involve the agreement by the Packard Foundation’s separately managed accounts to pay a counterparty a fixed or floating interest rate on a fixed notional amount and to receive a fixed or floating rate on the fixed notional amount. Scheduled payments will be made during the life of the swap agreement and also at either termination or maturity of the swap, in accordance with the master agreement.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
13
The Packard Foundation’s separately managed accounts establishes these swap agreements, International Swaps and Derivatives Agreements (ISDA), with the proper counterparties. The terms in the master agreements govern the details for the over-the-counter products and their specific structures.
Counterparty Credit Risk The use of derivative instruments by the Packard Foundation’s investment managers exposes the Packard Foundation to counterparty credit risk. This is the risk related to derivative counterparties not performing in accordance with the contractual provisions offset by the value of any collateral received. The Packard Foundation’s exposure to credit risk associated with the counterparty non-performance is limited to the related unrealized gains inherent in such transactions that are recognized in the consolidating statement of financial position. On a daily basis, the Packard Foundation’s investment managers and their counterparties, mark all positions to market and exchange collateral (subject to minimum transfer amounts) on a bilateral basis. The Packard Foundation’s investment managers will also utilize various measures to mitigate exposure to counterparty credit risk, some of which are: credit monitoring procedures, counterparty limits, master netting agreements, managing margin and tri-party collateral accounts.
4. Property and Equipment
Property and equipment at December 31, 2010, consisted of the following:
Packard
Foundation MBARI Total
Land 28,986$ 4,246$ 33,232$
Buildings 21,532 50,124 71,656
Research vessels and facilities - 61,581 61,581
Remotely operated vehicles - 15,094 15,094
Office furniture and equipment 7,000 23,281 30,281
Capital projects in progress 1,400 2,356 3,756
Total 58,918 156,682 215,600
Accumulated depreciation (17,126) (95,128) (112,254)
Property and equipment, net 41,792$ 61,554$ 103,346$
Depreciation expense for the year ended December 31, 2010 was $1,516 and $9,606 for the Packard Foundation and MBARI, respectively.
The Packard Foundation is currently constructing a new building for operations that is expected to be completed in 2012. The building is located in Los Altos, California and is being constructed on property already owned by the Packard Foundation. As of December 31, 2010 the Packard Foundation capitalized $1,400 as construction in progress in the accompanying financial statements.
5. Grants Payable
The Packard Foundation ordinarily makes grants to organizations that qualify as public charities under the Internal Revenue Code ("IRC"). When distributions are made to non-qualifying organizations, the Packard Foundation assumes the responsibility for the ultimate charitable use.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
14
Grants awarded but unpaid are payable at December 31, 2010, as follows:
Packard
Foundation
Less than 1 year 77,864$
1 to 5 years 42,868
Total 120,732$
6. Federal Excise Taxes and Other Taxes
In accordance with the applicable provisions of the IRC, the Packard Foundation is a private foundation and qualifies as a tax-exempt organization. Private foundations are liable for an excise tax of 2% (1% if minimum payout requirements prescribed by the IRC are met) on net investment income, excluding unrealized gains, as defined. The Packard Foundation was subject to the 1% rate for the year ended December 31, 2010. Deferred excise taxes arise primarily from unrealized tax basis gains on investments and are calculated at the effective rate expected to be paid by the Packard Foundation.
The income from certain investments is subject to unrelated business income tax.
The provision for current and deferred federal excise taxes for the year ended December 31, 2010, was as follows:
Packard
Foundation
Current 2,736$
Deferred 9,266
Total 12,002$
Distribution Requirements The Packard Foundation is subject to the distribution requirements of the IRC. Accordingly, it must distribute within one year after the end of each fiscal year, 5% of the fair value of its investment assets, as defined. The investments that can be included for the 5% distribution requirement are based on average monthly balances and are exclusive of those investments deemed to be held for charitable activities or program-related investments. In determining qualifying distributions, grant payments are considered on a cash basis and certain expenses are considered as qualifying distributions. The Packard Foundation has complied with the distribution requirements through December 31, 2010.
MBARI is a private operating foundation within the meaning of Section 509(a) of the IRC that makes its required charitable expenditures by sponsoring and managing its own programs. Pursuant to Section 4940(a) of the IRC, MBARI’s investment income, reduced by certain allowable expenses, is subject to excise tax at a rate of 2% of investment income. MBARI's status as an operating foundation is determined annually by satisfying the income test and certain other numerical tests. Generally, a private operating foundation must make qualifying distributions of 4.25% of the average fair value of the foundation's investment assets directly for the active conduct of the activities for which it is organized and operating. MBARI has met the requirements for private operating foundation status through December 31, 2010.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
15
7. Retirement Plans
The Packard Foundation Retirement Plans are as follows: The Packard Foundation sponsors defined contribution plans under both IRC Section 401(a) and 403(b). The plans cover all employees who meet eligibility requirements. Contributions to the 401(a) plan are made by the Packard Foundation at 15% of annual employee salary. Under the 403(b) plan and subject to statutory limits, employees make voluntary deferred salary contributions to the plan. Total expense related to such plans was $1,593 during 2010. As of December 31, 2010, $67 was accrued related to the plans.
The Packard Foundation also has a voluntary salary deferral plan for highly compensated employees under IRC Section 457(b). Employees with a base salary of $175 and above are eligible to participate in the plan. As of December 31, 2010, $522 was deferred based on elections made by the participants.
The Packard Foundation has a Nonqualified Benefits Restoration Plan (the "Restoration Plan") primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees to accumulate retirement assets. The Restoration Plan allows the Packard Foundation to make contributions to a participant's account equal to the amount in excess of IRC limits that the participant would otherwise have been eligible for in accordance with the Packard Foundation's 401(a) plan. The Restoration Plan is intended to be an unfunded plan although voluntary contributions are made to a grantor trust. Total expenses related to the Restoration Plan were $119 during 2010.
The Packard Foundation has a contributory retiree medical program (the "Plan") that will cover substantially all employees who meet eligibility requirements. The Packard Foundation will pay from 55% to 75% of the insurance premium for eligible retired employees with a minimum age of 55 and the combination of years of service and age equal to 65 or greater. This Plan can be amended at any time upon Board approval.
The following information presents the Plan's unfunded status and amounts recognized in the consolidating statement of financial position as of December 31, 2010, based on a measurement date of December 31, 2010:
Packard
Foundation
Benefit obligation (6,659)$
Fair value of plan assets -
Unfunded status (6,659)
Amount recognized in the consolidating statement of financial position as postretirement benefit liabilities (6,659)$
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
16
Amounts recognized in unrestricted net assets at December 31, 2010, were as follows:
Packard
Foundation
Prior service cost 1,923$
Net gain (509)
Total 1,414$
The estimated prior service cost and net gain for the Plan that will be amortized from unrestricted net assets into net periodic postretirement benefit cost in 2011 is as follows:
Packard
Foundation
Amortization of prior service cost 184$
Amortization of net gain -
Total 184$
Changes in unrestricted net assets as a result of actuarial gains/losses and amounts amortized for the year ended December 31, 2010 were as follows:
Packard
Foundation
Net actuarial gains and losses (32)$
Amortization of net gain or (loss) -
Amortization of prior service cost (184)
Total recognized in unrestricted net assets (216)$
The Packard Foundation's contributions to the Plan and benefit payments made from the Plan for the year ended December 31, 2010, were $57 and $57, respectively. Participants’ contributions totaled $30 for the year ended December 31, 2010.
The net periodic postretirement benefit cost reflected in the consolidating statement of activities and changes in net assets for the year ended December 31, 2010 was $1,011.
A weighted-average discount rate of 5.5% was used in determining the accumulated postretirement benefit obligation as of December 31, 2010 and a weighted-average discount rate of 6% was used in determining the net periodic postretirement benefit cost for the year ended December 31, 2010.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
17
The Plan is fully insured and is funded on a pay-as-you-go basis. The estimated minimum benefit payments that by year reflect expected future service, as appropriate, to be paid by the Packard Foundation are as follows:
Packard
Years Ending December 31 Foundation
2011 105$
2012 141
2013 175
2014 196
2015 236
2016-2020 1,995
The annual rate of increase in the per capita cost of medical benefits (i.e., health care cost trend rate) was assumed to be 12% in 2010, declining by 1% per year through 2017 and then remaining at 5% thereafter. A 1% point increase in this rate would increase the accumulated postretirement benefit obligation by $1,197 and the service cost plus interest cost components of the net periodic postretirement benefit cost by $179. A 1% point decrease in this rate would decrease the accumulated postretirement benefit obligation by $965 and the service cost plus interest cost components of net periodic postretirement benefit cost by $140.
MBARI Retirement Plans are as follows: MBARI sponsors defined contribution plans under both IRC Section 401(a) and 403(b). The plans cover all employees who meet eligibility requirements. Contributions to the 401(a) plan are made by MBARI at 10% of an employee’s annual salary. Under the 403(b) plan and subject to statutory limits, employees make voluntary deferred salary contributions to the plan. Total expense related to such plans was $1,854 during 2010.
MBARI sponsors a Section 457(b) Qualified Eligible Salary Deferral Plan (the "Salary Deferral Plan") primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees to accumulate retirement assets. The Salary Deferral Plan enables participants to defer income on a pre-tax basis. At December 31, 2010, MBARI held other assets of $1,213 that are included in prepaid and other assets. These assets are designated by MBARI to pay future Salary Deferral Plan liabilities of $1,213 as of December 31, 2010. This liability is included in accounts payable and other liabilities.
MBARI also sponsors a Nonqualified Deferred Compensation Restoration Plan (the "Compensation Restoration Plan") primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees to accumulate retirement assets. The Compensation Restoration Plan provides for MBARI to make contributions to a participant's account equal to the amount in excess of IRC limits which the participant would otherwise have been eligible for in accordance with MBARI's 401(a) plan. At December 31, 2010, MBARI held other assets of $35 that are included in other assets, which are designated by MBARI to pay future Deferred Compensation Restoration Plan liabilities of $35 as of December 31, 2010. These liabilities are included in accounts payable and other liabilities.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
18
Effective July 1, 2007, MBARI adopted a contributory retiree health insurance program (the "MBARI Plan") which covers substantially all employees who meet the eligibility requirements. MBARI will pay 50% of the insurance premium for eligible retired employees with a minimum age of 55 and a combination of years of service and age equal to 65 or greater. The MBARI Plan can be amended at any time upon Board approval.
Effective March 1, 2009, the plan was amended. Henceforth, retired employees are no longer eligible to participate in MBARI’s insured medical plan. Instead, each August 1
st, MBARI will make a
contribution on behalf of each retired employee to a healthcare savings account (HSA). The amount of the contribution will be 50% of the annual premium that is charged by MBARI’s health insurer for an employee with the same family status (single or two-party coverage) as the retiree. The retiree may then spend the amount in the HSA on any medical expenses that are tax-deductible, including premiums for health insurance. However, the retiree cannot participate in MBARI’s insured plan.
As a result of the plan amendment, the accumulated plan benefit obligation was re-measured on March 1, 2009. On that date, the discount rate was set as 6.68%. The accumulated plan benefit obligation on March 1, 2009 was $7,051 before the plan amendment and $7,635 after the plan amendment. The difference of $584 was added to the unrecognized prior service cost and is being amortized in periods after March 1, 2009.
The following information presents the MBARI Plan's unfunded status and amount recognized in the consolidating statement of financial position as of December 31, 2010, based on a measurement date of December 31, 2010:
MBARI
Benefit obligation (12,893)$
Fair value of plan assets -
Unfunded status (12,893)
Amount recognized in the consolidating statement of financial position as postretirement benefit liabilities (12,893)$
Amounts recognized in unrestricted net assets at December 31, 2010, were as follows:
MBARI
Prior service cost 6,032$
Net gain (3,653)
Total 2,379$
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
19
Changes in postretirement benefit liabilities recognized in unrestricted net assets were as follows:
MBARI
Net loss 1,135$
Prior service cost -
Amortization of net gain 731
Amortization of prior service cost (3,055)
Total recognized in unrestricted net assets (1,189)
Net periodic postretirement benefit cost 3,510
Total recognized in net periodic benefit cost and unrestricted net assets 2,321$
Total contributions paid and benefit payments made from the MBARI Plan for the year ended December 31, 2010 were $28 and $28, respectively.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 5.6% as of December 31, 2010, and in determining the net periodic postretirement benefit cost was 6.0% for the year ended December 31, 2010.
The estimated prior service cost and net gain for the Plan that will be amortized from unrestricted net assets into net periodic postretirement benefit cost in 2011 is as follows:
MBARI
Amortization of prior service cost 3,055$
Amortization of net gain (731)
Total 2,324$
The MBARI Plan is fully insured, and is funded on a pay-as-you-go basis. The estimated minimum benefit payments by year that reflect expected future service, as appropriate, to be paid by MBARI are as follows:
Years Ending December 31 MBARI
2011 104$
2012 167
2013 249
2014 337
2015 405
2016 - 2020 3,236
The annual rate of increase in the per capita cost of medical benefits (i.e., health care cost trend rate) was assumed to be 10% in 2010, declining by 1% per year through 2014, and then remaining at 5% thereafter. A 1% point increase or decrease in this rate would increase or decrease the accumulated postretirement benefit obligation by $2,631 and $(2,094), respectively, and increase or decrease the service cost plus interest cost components of the net periodic postretirement benefit cost by $266 and $(208), respectively, for the year ended December 31, 2010.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
20
8. Commitments and Contingent Liabilities
The Foundation has non-cancelable operating leases for certain land, facilities, furniture and equipment. The terms of these leases expire in 2011 through 2039, with certain options to renew. Certain rental rates are subject to adjustment based on increases in the consumer price index. Future minimum lease payments under non-cancelable operating leases at December 31, 2010, are as follows:
Packard
Years Ending December 31 Foundation MBARI Total
2011 28$ 121$ 149$
2012 31 24 55
2013 23 25 48
2014 8 25 33
2015 - 26 26
Thereafter - 777 777
Total 90$ 998$ 1,088$
Rent expense for the year ended December 31, 2010, was $186.
Prior to December 31, 2002, the Packard Foundation guaranteed bonds that, at original issuance, amounted to approximately $4,429. The Packard Foundation would be required to perform under the guarantee should the beneficiary be unable to meet its obligation. The guarantee has amortized to a total outstanding obligation of approximately $629 as of December 31, 2010, and the guarantee will be further reduced by scheduled payments. The guarantee will expire in July 2012. The Packard Foundation has not recorded any liability for its obligations under the guarantees because it believes that the likelihood of making any payments is not probable.
As of December 31, 2010, MBARI has $500 on deposit as collateral to guarantee that MBARI will comply with the provisions of a land lease entered into with the State of California, California State Lands Commission to obtain right-of-way use needed for the construction of one of MBARI’s projects, the MARS Project. This amount is included in other assets in the consolidating statement of financial position.
MBARI derives a portion of its revenues from various federally funded programs that are subject to review and audit by governmental oversight agencies. MBARI management believes that MBARI is in material compliance with the standards set forth by the federal governmental agencies and that the outcome of reviews and audits conducted by such agencies will not have a significant effect on the financial position or changes in net assets of MBARI.
Claims Claims are filed from time to time against MBARI in the ordinary course of business. MBARI is not aware of any such matters that would have a material adverse effect on MBARI’s financial position.
The David and Lucile Packard Foundation
Notes to Consolidating Financial Statements December 31, 2010 (dollars in thousands)
21
9. Minimum Future Rental Revenues
MBARI leases land and facilities to others under non-cancelable leases with lease terms expiring in 2011 through 2015, with options to renew. Certain rental rates are subject to annual increases ranging up to 3%.
Minimum future rental receipts from operating leases having noncancelable lease terms in excess of one year as of December 31, 2010 are approximately as follows:
Years Ending December 31 MBARI
2011 140$
2012 127
Thereafter 295
562$
10. Subsequent Events
The Foundation has evaluated subsequent events for the period December 31, 2010 through July 14, 2011, the date the financial statements were issued.